Franchisors sometimes control the Franchisee’s business premises by leasing or subleasing the premises to the Franchisee or requiring the Franchisee to sign a collateral assignment to the Franchisor of the lease for his business premises. Control of the Franchisee’s business premises gives the Franchisor more effective control of the Franchisee and his business.
The premises continue to be part of the Franchisor’s network even if the Franchisee does not. However, such control increases the capital requirements of the Franchisor or involves contingent liability and administrative effort and cost, unless control is implemented by means of collateral lease assignments.
This practice is common in the Philippines mostly with the 3 leading Petroleum Companies only. In the USA, most franchise location are leased by the Franchisor and sub-leased to the Franchisee. In the Philippines Franchisee have to find their own location and sign up direct lease agreements.
Another way to secure the location for the Franchisor in any eventuality is to let Franchisee and Landlord sign a three-party agreement called the “Agreement with Landlord”, which secures the location for the Franchisor in the event Franchisee defaults on Landlord or Franchisor. It is generally difficult to secure consent to such assignments from malls and it may be difficult to secure consent from any landlord without at least some guaranty. SM even require Franchisor to sign a 3-party agreement guaranteeing the payment of rent in the event Franchisee fails to pay for it.
Franchisors grant exclusive or protected territories to their Franchisees to facilitate sales of franchises and to motivate effective market development by the Franchisee that, theoretically, will be more inclined to invest in the development of his business if he has no competition of the same brand in his area.
Many Franchisors have discovered that they made to large initial estimates of the population required for a successful franchised business (once their network trademark became more widely recognized) and that large spaces between franchises only invited competitors. Large territories also may interfere with adjustment to changing markets and inhibit the offering of additional franchises to productive Franchisees.
Structuring the franchise to enable the Franchisor to achieve greater market penetration by granting limited territorial protection and reserving rights to sell to some customers within the Franchisee’s territory will tend to result in more system expansion conflicts with existing Franchisees.